Severe action, finally, in the DSQ Software fiasco

Sep 13, 2004

After getting away with the most brazen fraud and violation of almost every law, disclosure norm and good governance rule, Dinesh Dalmia of DSQ Software has finally been booked. In one of its harshest orders yet, the Securities and Exchange Board of India (Sebi) has appropriately barred Dinesh Dalmia and DSQ Software from accessing the capital market ‘in any manner’ for 10 years. It has also asked him to buy 1.3 crore shares circulated in the secondary market without listing and hold them in a separate Demat Account until the capital of the company is permitted to be reduced to that extent. Further, he has been asked to deposit the value of 1.30 crore shares calculated at Rs 630 crore (at an average price of the shares in the settlement when they were fraudulently issued), in a separate escrow account, until various police and investigative agencies, including the Central Bureau of Investigation (CBI) complete their investigation. This was the extent of direct benefit he derived through his fraudulent activities. In another unusual development, Sebi has handed out harsh punishment to four reputed ‘independent’ directors on DSQ’s board. Although cynics would argue that Sebi’s order will simply be watered down by the appellate body, the regulator’s severe action merits close examination. But before that, a quick recap of what Dalmia has been punished for. Dalmia has been held guilty of ‘irregularities’ in the allotment of 1.70 crore shares. He issued 1.4 crore shares (worth Rs 945 crore then) to three Mauritius-based companies that belonged to him, while claiming that they were meant to acquire a San Jose-based company called Fortuna Technologies through a swap deal. He ‘wrongly’ introduced 1.30 crore shares into the secondary market. He also made false claims to the National Share Depository (NSDL) to introduce partly-paid up shares as fully paid up, without ever listing them on any recognised stock exchange. In fact, he increased his capital by as much as 50 per cent without informing shareholders, bourses or regulators about it. The Sebi investigation stops at the fraudulent preferential allotment of shares to Dalmia’s own firms located abroad. It hasn’t gone into his subsequent shenanigans, including the sale of a big chunk of his business and contracts to Scandent Network. No agency has investigated how Dalmia demerged the US and European subsidiaries of DSQ Software, renamed them as Total Infosystems and sold off their main business contracts to the Scandent Network Pvt Ltd, which has operations in India and abroad. The deal with Scandent took place in April 2002 and Dalmia is understood to have collected over Rs 145 crore, which didn’t find its way to DSQ Software. This has not been investigated, although The Indian Express had published details of the deal in the same year. Secondly, it must be remembered that several investigative agencies have been dragging their feet on the Dalmia investigation for the past four years. They include the police, the Enforcement Directorate and the CBI. There are also scores of civil suits and Sec. 138 cases pending against him. The Ministry of Company Affairs (MCA), while promising to crack down against offenders has been busy ‘compounding’ his offences and letting him get away with paltry fines. That’s not all. DSQ was the first case to be transferred to the Serious Frauds Office (SFO) that was created in line with the recommendations of the Joint Parliamentary Committee of 2001, but nothing has come out of that either. In evaluating the deterrent impact of Sebi’s order, one has to concede that few companies would dare to indulge in the sort of shenanigans that Dalmia hoped to get away with. But exemplary punishment is always meted out to the most brazen offences. In asking Dalmia to return the Rs 630 crore that he swiped out of DSQ, (the shares traded at Rs 2,800 during their peak and now trade around Rs 8), Sebi is for the first time attempting to force an industrialist to disgorge shareholder funds, transferred out of listed companies. In doing so, it has made an interesting distinction between the punitive powers available with it and the issue of disgorgement of ill-gotten wealth. Even under the amended Sebi Act, penalties against directors can go up to three times the quantum of offence going up to a cap of Rs 25 crore. These are direct penalties, and Sebi hasn’t even touched them. Instead, it has ordered simple disgorgement of the money earned by Dalmia, when he sold shares in the open market at peak prices. Finally, there is Sebi’s order against independent directors — Mohammed Ghulam Ghouse, B.K. Pal, K.M. Venkateshwaran and Brig (Retd) V.M. Sundaram — debarring them from the capital market for five years for failing to exercise due diligence and in the process abetting Dalmia’s ‘‘large scale fraudulent activities’’. For the first time after SEBI’s corporate governance code placed greater responsibility on independent directors, they have been held accountable for failing to stop Dalmia’s mischief. Each of these honourable directors has pleaded that he was not in charge of day-to-day operations and didn’t know what Dalmia was doing. But that is precisely the failure. We have evidence that they were aware of the many press reports about Dalmia’s activities but were happy to accept his concocted explanations and remain on the board. Independent directors of companies have always evaded their fiduciary responsibility to their stakeholders, while enjoying all the perks of office. If they are not held accountable in cases as brazen as this, then the corporate governance code itself becomes redundant. Interestingly, just a few days ago, the Kolkata police arrested Alok Biyani of Biyani Securities, as he was leaving for Australia from the DumDum airport. Biyani and his father were deeply involved in the DSQ share scam and were allowed to fraudulently introduce 10 lakh shares of DSQ into the market. Clearly, Dalmia and his directors will appeal the Sebi order. It is also possible that Dalmia may evade punitive action for several years to come. Investors who have lost a great deal of money in DSQ companies can only hope that this spectacular order will goad other investigative agencies to step up their investigations into Dalmia’s other activities and companies to further bolster Sebi’s case.